Comment: The following article appeared in the Cyprus Mail of Nicosia on 22 February 2004.

Negotiators ignore the economy at their peril

"It is morally unjust to expect the Greek Cypriot taxpayer to pay compensation to people who had been deprived use of their property for 30 years by Turkey..."

ON PRESENTING the first version of the Annan peace plan some 15 months
ago, United Nations officials took pride in the fact that this was the
most comprehensive settlement plan for Cyprus ever drafted. It offers
compromise solutions on every single issue that had been raised over
decades of on-off negotiations, as well as on matters that could arise
after a settlement had been agreed. It also proposes practical ways of
resolving disputes so that the functional problems experienced in the
1960s could be avoided this time round. Many top professionals had
worked extremely hard putting together what they believed to be a
comprehensive plan.

While this may be true about the constitutional, territorial and
security aspects of a settlement, there is one area in which the work of
the UN mediators leaves a lot to be desired – the costs of
implementation of the plan and the effects its provisions would have on
the island’s economy. An examination of the provisions directly
affecting the economy suggest the technocrats who drafted the plan were
not economists. Matters were not helped by the fact that the Greek
Cypriot negotiating teams, past and present, consisted of lawyers
incapable of recognising the debilitating economic consequences that
many of the provisions would have if enforced.

The main economic problems that would arise from the implementation
of the Annan plan were explored in a discussion paper written by
Constantinos Lordos for a TESEV workshop held in Istanbul last month.
They do not make for pleasant reading. For instance, compensation to
those who will lose property as a result of the plan would amount to
about £10 billion. If reparation was given in the form of long-term
property bonds, with an annual yield of about 3.5 per cent that could be
converted after 10 or 15 years, the effects on the economy would be
devastating.

First, the issue of the bonds would be akin to printing money,
fuelling inflation. Second, the large increase in the supply of land
would push down real estate prices, destabilising the banking system,
which uses real estate as security for loans. Third, the cost of
servicing the bonds plus the cost of management of the Property Board
would amount to some £400 million every year. Fourth, after 10 or 15
years, the bonds would be converted, putting even greater strain on
state coffers and the economy. While the Property Board may have
generated some funds, most of the £10 billion compensation would have to
be paid by the taxpayer.

But the financial burden does not end there. According to Lordos’
paper, the cost of reconstruction would amount to about £3.6 billion
over the next 10 years (£350 million per year). Add to this the £350
million required each year to service the existing debts of the
Republic, £350 million for the annual development budget plus £100
million for the economic alignment of the Turkish Cypriot constituent
state and the picture looks far from rosy.

And it gets worse. Both the republic and the regime in the north
boast very large and costly public sectors, to which will be added a
federal civil service to handle matters relating to the two states.

On the plus side (though a drop in the ocean compared to what is
needed), the National Guard would be disbanded saving about £200 million
a year and the European Union would contribute some 250 million euros
over the next three years. There will also undoubtedly be a donors’
conference immediately after an agreement, but it would be a mistake to
put too much faith in this. Admittedly, the market will expand and there
will be business ventures and investment opportunities in a united
Cyprus, but it would be over-optimistic to think these would raise the
massive funds needed to finance a settlement. The international credit
rating agency, Standard and Poor’s, in its latest report about Cyprus,
noted the poor public finances (fiscal deficit for 2003 is six per cent
of GDP) and noted that a settlement would put an additional burden on
them.

This is not said in order to make a case against an agreement, but
to draw attention to what we regard as fundamental weaknesses of the
Annan plan, which, if not addressed, will put the very future of a
settlement at serious risk. We assume the better-off Greek Cypriots will
be forced to finance the settlement and that this would be done through
the imposition of higher direct and indirect taxes, which are certain
to stir resentment. It is perfectly understandable for people to be
indignant at having to pay higher taxes in order to compensate
themselves for property they have lost in a settlement and for the
economic development of the north. It is morally unjust to expect the
Greek Cypriot taxpayer to pay compensation to people who had been
deprived use of their property for 30 years by Turkey. Why is Turkey not
made to contribute to the settlement cost by the plan?

A settlement that places such financial strain on the economy would
never last. This is why it is of critical importance for President
Papadopoulos to negotiate radically improved arrangements for the
financing of a settlement at the current talks. Alvaro de Soto and his
advisors must recognise that only if a solution improves people’s living
standards – or, at worst, leaves them unaffected – could it last. If
people are better off, they will not care about constitutional
provisions; if they are worse off, these things suddenly become an
issue.

Under normal circumstances, peace and stability are prerequisites
for growth, but in a post-solution Cyprus, the opposite will be true.
Economic growth and material well-being will be necessary for peace and
stability."